A dovish Fed and improving UK jobs market lift European stocks

European bourses have powered higher out of the starting blocks on Tuesday, boosted by the Fed’s promise of low rates for longer and upbeat UK jobs data.

Inflation concerns dominated the markets last week, but they’re starting to ebb after softer-than-expected US consumer spending and further reassurance from the Fed. Last night it was the turn of Dallas Fed Robert Kaplan, whose soothing words and supportive stance boosted risk sentiment. Federal Reserve Vice Chair Richard Clarida also highlighted the soft jobs data as a sign that the US economy wasn’t at a point where support could be withdrawn.

The Fed is really driving this dovish message hard. Overall, the market appears to be taking the message onboard, which is offering support to equities and dragging on the US dollar. US futures are pointing to a stronger open.

Adding to the upbeat mood, UK data pointed to the jobs market turning a corner. In the three-month run-up to March, the unemployment rate unexpectedly dropped again, decreasing from 4.9% in February to 4.8%, despite the ongoing lockdown at the time. A third consecutive month of falling unemployment suggests the peak rate caused by the pandemic wasn’t as high as feared. While the furlough scheme has succeeded in preventing a wave of redundancies, there is little doubt the jobless rate will rise again when it concludes in September. The BoE expects unemployment to rise to 5.4% in the third quarter, helped by the fact that the economy should be fully re-opened by then.

The FTSE is holding comfortably above the key 7000 level. Robust jobs data and re-opening optimism is overshadowing concerns over the Indian Covid variant, which is spreading rapidly. Even so, initial findings suggest the vaccine copes well with the new strain. As long as the inoculation programme continues at a fast rate and there is high uptake, then the Indian variant should not slow economic recovery. This risk is likely to linger over the coming weeks as 21 June – the planned date of the final re-opening step – approaches.

Meanwhile, the Dax trades just short of the key 15500 level, which could open the door to a fresh all-time high.

FX – USD falls, GBP hits 1.42 post jobs data

Signs of improvement in the UK labour market as the economy prepares to re-open has boosted the pound above 1.42 versus the US dollar. The encouraging data comes just a day after several more lockdown restrictions were eased, seeing more businesses throw open their doors. As the market takes the Fed at its word, US dollar weakness is also playing its part in supporting cable.

Elsewhere, the risk-on market mood is keeping the euro elevated above 1.22, a three-month high. Several European countries are starting to ease pandemic restrictions as Covid numbers decline. After a slow start, the vaccine programme is also ramping up on the old continent, setting the scene for a strong re-open and a pick up in tourism over the critical summer months in countries such as Italy and Spain.

There were no surprises from the Eurozone Q1 GDP reading, which confirmed the preliminary print of -0.6% contraction quarter on quarter. However, investors are looking past this backward-looking data and are instead cheering the expected recovery.

For a look at all of today’s economic events, please check out our economic calendar at www.marketpulse.com/economic-events/

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